S.F. has room for a new development trend as hotels rise

Construction has started on a 220-room hotel project at 250 Fourth Street, one of several South of Market.

Construction has started on a 220-room hotel project at 250 Fourth Street, one of several South of Market.

Photo: Paul Chinn, The Chronicle

Image 2 of 7

The old Grant Building at Seventh and Market streets is being transformed into one of the city’s many future hotels.

The old Grant Building at Seventh and Market streets is being transformed into one of the city’s many future hotels.

Photo: Paul Chinn, The Chronicle

Image 3 of 7

The old Grant Building at Seventh and Market streets is being transformed into one of the city’s many future hotels.

The old Grant Building at Seventh and Market streets is being transformed into one of the city’s many future hotels.

Photo: Paul Chinn, The Chronicle

Image 4 of 7

The old Grant Building at Seventh and Market is being turned into a hotel.

The old Grant Building at Seventh and Market is being turned into a hotel.

Photo: Paul Chinn, The Chronicle

Image 5 of 7

Early construction has started on a hotel project at 250 Fourth Street in San Francisco, Calif. on Thursday, March 31, 2016.

Early construction has started on a hotel project at 250 Fourth Street in San Francisco, Calif. on Thursday, March 31, 2016.

Photo: Paul Chinn, The Chronicle

Image 6 of 7

A man walks below scaffolding where the Hotel Via is under construction across from AT&T Park on King Street in San Francisco, Calif. on Thursday, March 31, 2016.

A man walks below scaffolding where the Hotel Via is under construction across from AT&T Park on King Street in San Francisco, Calif. on Thursday, March 31, 2016.

Photo: Paul Chinn, The Chronicle

Image 7 of 7

Sparks fly from a welder's torch during construction on the Hotel Via across from AT&T Park on King Street in San Francisco, Calif. on Thursday, March 31, 2016.

Sparks fly from a welder's torch during construction on the Hotel Via across from AT&T Park on King Street in San Francisco, Calif. on Thursday, March 31, 2016.

Photo: Paul Chinn, The Chronicle

S.F. has room for a new development trend as hotels rise

1 / 7

Back to Gallery

After five years in which housing and office developers battled for available land to build on, a third category of investor has muscled into the San Francisco market in a big way: hotels.

Over the past 12 months, more than a dozen new hotel projects have been proposed, swelling a pipeline that now has many hotel proposals with more than 4,000 rooms in it. If they all get built, San Francisco’s new generation would include hotels in Mid-Market, Mission Bay, South of Market and the Transbay neighborhood. Others would be added to the northern waterfront, Fisherman’s Wharf and the Marina.

And at 8 Washington St., a northern waterfront property where neighbors went to the ballot in 2013 to kill plans for luxury condos, a new developer is exploring a deal that would skip housing in favor of an eight-story hotel.

The crop of hotel proposals is being driven by market forces — booming tourism, robust business travel, healthy convention business and development that has added only a handful of major hotels in the last 15 years.

Demand, and prices, are high. San Francisco had a record number of visitors in 2015 — 24.6 million, an increase of 2.7 percent from 2014. The average price for a room jumped 88 percent between 2014 and 2015 to nearly $400 a night, according to an index compiled by Bloomberg of the world’s top 100 financial centers.

Housing obstacles

At the same time, uncertainty around city’s land-use politics — partly surrounding proposals to increase affordable housing — may be partly responsible for the influx in hotel projects, some industry observers say.

“At a time when we are seeing some uncertainty in the housing market, hotels in San Francisco are finally starting to pencil,” said Sam Suleman, an executive vice president with Equinox Hospitality, which builds, manages and consults on hotels. “Suddenly, we’re seeing a lot more speculative hotel projects than we have seen in a while. And some of these projects are replacing what would have been condos or apartments or office buildings.”

Several properties previously slated for housing have been switched to hospitality, including 1125 Market St., a vacant lot next to American Conservatory Theater’s Strand Theater, and 48 Tehama St., now proposed for a 95-room hotel.

Other projects that had been contemplated for 100 percent office or residential, such as 555 Howard St., are now envisioned as luxury hotels mixed with some office space and a smaller number of condominiums.

One reason developing hotels can look more attractive than building housing is a proposition on the city’s June ballot to double the required amount of below-market-rate housing in a new residential development, from 12 to 25 percent.

“It’s not surprising that as housing becomes more difficult to build or less financially attractive, we’re seeing developers turning to hotels,” said Tim Colen, executive director of the Housing Action Coalition, which lobbies for new housing. “Housing production is definitely going to fall in 2016.”

Photo: Paul Chinn, The Chronicle

Developers are renovating the old Renoir Hotel at McAllister and Market streets in San Francisco, Calif. on Thursday, March 31, 2016.

Developers are renovating the old Renoir Hotel at McAllister and...

Meanwhile, would-be developers of office towers have to wrestle with the office cap imposed by the 1986 Proposition M, a measure that voters passed to slow down what was seen as the Manhattanization of San Francisco. Prop. M allows the city to approve an additional 925,000 square feet of office space each year, a pool that grows when there are few new projects but gets eaten up quickly when the market is hot. Currently, there is 1.6 million square feet available under the cap, but more than 10 million square feet in the pipeline. Hotel rooms do not fall under the cap.

Physical evidence of the hotel boom isn’t yet apparent — several hotels are under construction or about to start. Two historic buildings are undergoing conversion on central Market Street, including the former Renoir Hotel, which was delayed 18 months because of a fire. At 144 King St., across from AT&T Park, developer David O’Keefe is finishing up Hotel Via, a 132-room boutique inn.

“It’s going to be a really nice hotel across from the ballpark with a wonderful restaurant bar and rooftop terrace,” said architect Michael Stanton, whose firm is designing about a half dozen San Francisco hotels. “You’ll be able to have some nice parties up there.”

At 250 Fourth St., developer Jay Singh will break ground this month on a 220-room hotel. Stanford Hotels is about to start work on a 250-room property on Mission Bay’s Block 1, across the street from where the San Francisco Giants are planning a massive mixed-use development.

The Pacific Eagle Holdings Corp. has two hotels in the planning phase, according to Senior Vice President Hans Galland. One is at 1125 Market St., which will target a younger Millennial traveler who may want to stay close to Mid-Market tech firms like Twitter, Zendesk and Square.

The other, at 555 Howard St., will be flagged with the group’s luxury Langham brand. It will be part of a high-rise that will also include some condos. Langham has hotels in Boston, Pasadena, Chicago and New York. The group has long wanted a presence in San Francisco, where it has an office.

“We only invest in very, very strategic markets with a long-term holding strategy,” he said. “San Francisco has become one of the most important economic centers in the West, arguably the world.”

But for every hotel builder who lands a site, another two or three are kicking tires, Stanton said. “The only thing discouraging people is the difficulty of finding sites.”

San Francisco’s pipeline still pales in comparison to other cities. Over the past six years San Francisco added fewer than 300 rooms, while New York City added 18,000 rooms and has another 36,000 rooms in the pipeline, according to CBRE Hotels. New York’s pipeline represents 12 percent of its existing stock; in San Francisco it’s more like 2 percent.

“If you look at what has been announced over the last two to three years and what has materialized, it’s minimal,” said San Francisco hotel consultant Rick Swig, whose family formerly owned the Fairmont Hotel on Nob Hill. “The discussion around use here has long been housing first and office second.”

For years San Francisco’s room rates were not high enough to justify construction and labor costs that were on par with New York City. This is still an expensive place to operate, with both the construction and hotel workers unionized.

But suddenly, with room rates soaring, the cost of doing business makes sense.

Mark Fraioli, senior vice president with Jones Lang LaSalle’s Hotels & Hospitality Group, “It is a city that has only moved from strength to strength in the post-recessionary years.”